1031 or 75% refinance cash out?

Question

I have a duplex I am looking to possible do a 1031 in Austin TX.  I have also been reading up on the BRRRR method so was also looking into doing a 75% cash out refinance.  Here are some numbers below.

Purchased in 2015 for 260,000 (FHA loan)

Current mortgage remaining 227,000

Appraisal estimate= 385,000-415,000

Estimated cash out= 70-75,000

Which would make more sense, I think with the cash out refi could still have possible a $ 300.00 cash flow and around 100,000 equity left (25%)?

Jaysen Medhurst · Answer

I think there's more to consider here, @Robert Skruhak. Starting with Return on Equity (ROE). With $100k of equity remaining in your duplex after refi, you're ROE is going to be <4%. Not great. Of course, Austin has seen some great appreciation. That's likely to continue, but not guaranteed.

What else could your money be doing for you, if you do a 1031 exchange? What kind of property could you step up to with ~$150k to work with? That's a $600-750k property, perhaps 5+ units where you can force appreciation.

The other wrinkle here is that you may have trouble finding a lender to do a cash-out at terms you're happy with. Lending standards are tighening.

Robert Skruhak · Answer

@Jaysen Medhurst you are exactly right.. After looking into the refi most banks have stopped it completely for the time being.  I will look to continue with the 1031 and make the money work for me here in San Antonio.  You really get a bang for your buck here so will see how it goes.  Thanks for your insight.

Dave Foster · Answer

@Robert Skruhak, Good thoughts by @Jaysen Medhurst.  Your opportunity costs have to be considered.  leaving that much equity in and getting the case return you would be getting is pretty light.  Cut bait and go to new purchases.  Better rates than a refi and the1031 let's you deploy 100% of equity.

Robert Skruhak · Answer

@Stone Saathoff Well the refi is definitely off the table for now, most banks put a stop to the 75% cash out.  I want to grow my portfolio and prob move out of Austin since property tax has been sky rocketing the last few years.  San Antonio will give me more doors with a few duplexs 4-plex etc.  Cash flow will also be better since when I bought the Austin property it was a house hack with FHA loan.  I want to start investing and not just holding one duplex.

@Danny Webber that is something to think about too and what I was planning if I could do a cash out refi, start looking into my first BRRRR.  I think both are good options but one is off the table at least for now.

Danny Webber · Answer

If you can qualify for another purchase you may want to look outside of Austin for a property to buy outright with your funds. Alternatively, any and all strategies will work depending on your goals.

Stone Saathoff · Answer

Based on the numbers you gave the cash out refi isn't totally off the table. Still cashflowing 300$/month and having 70K to put towards your next deal works, especially if you're now looking in San Antonio since the prices are so much lower.

If you did a 1031 exchange you could pick up another duplex here or even get multiple single family deals going.

What is the goal for you? More doors period or more doors on one property? The refi will give you more doors period but the exchange opens you up to getting a larger multi family property.

1031 or 75% refinance cash out?

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